What's to lose on a 0% car loan? Or 120 days of no payments? Plenty

Wednesday

May 6, 2020 at 4:00 PM

Getting someone to buy a new car during the coronavirus-induced recession increasingly involves a pitch from a car company on how to skip making a couple of payments.

Fiat Chrysler launched financing incentives in May that now offer no payments for 120 days — or up to four months — on most 2019 and 2020 model year Chrysler, Dodge, Jeep Ram and Fiat vehicles. The initial rollout in April during the coronavirus pandemic was for 90 days of deferred payments but that's now gone up by a month.

Fiat Chrysler is also offering 0% for 72 months on select makes and models.

Ford Motor, for example, is running TV ads that proclaim "six months, no payments" on many new car and truck purchases.

Eligible new car customers who finance through Ford Credit can tap into what Ford calls its "Built to Lend a Hand Program." Ford will pay for three months and customers can defer for up to three months for a total of up to six months. The program is for those buying new 2019 and 2020 model year vehicles, excluding 2020 F-Series Super Duty trucks.

General Motors says its incentives vary by vehicle line and model year. A 0% offer for 84 months is available in some cases to "very well qualified borrowers." GM also offers a payment deferral option on some vehicles for up to 120 days.

Making a case to buy

Automakers know that financial incentives must rev up consumer confidence and outrun the nagging feeling in the customer's mind that somehow something else could go wrong here.

"We are all in the same position of not wanting to overextend ourselves with the uncertainty of potential furloughs, layoffs and other employment cutbacks," wrote Brad Korner, general manager of Cox Automotive Rates & Incentives.

So suddenly a new car payment can be more affordable each month if you're looking at a 0% rate and a loan term that goes out up to seven years. And some of those offers for qualified buyers may even go across their entire fleets, he said.

The payment deferral plans of 90 days, and now 120 days, give car shoppers more reassurance that they can handle things if the economy doesn't recover quickly.

No doubt, consumers are fearful as we move further into the unchartered territory of shutting down an economy — and then gradually restarting it — to limit the exposure of many workers to COVID-19. Even as economic activity gradually resumes, the extent and on-going nature of the virus remain a big unknown.

Many don't want to take on a any loan right now

Car sales tanked in April. Consumers pulled back dramatically on borrowing by late March as factories, restaurants, stores and others temporarily shuttered operations and laid off workers during the initial fight against the coronavirus.

Auto loan inquiries, for example, fell by 52% between the first week and the last week of March, according to a report issued by the Consumer Financial Protection Bureau on May 1.

Though all states experienced a drop, the report noted, Michigan, California, Nevada and states in the Northeast experienced the largest drops in auto loan inquiries, possibly reflecting some of the large job losses and COVID-19 cases in many of those areas.

Reviewing inquires gives the first sign of changing pattens relating to the use of new credit after a major economic shift.

Consumers also showed far less interest in taking out new mortgages, as inquiries fell by 27%, and opening credit cards, with inquiries dropping 40%.

Oddly enough, consumers with the highest credit scores showed the least interest in taking on new debt. The report noted that consumers with higher credit scores may have more financial flexibility in timing their borrowing.

Deals, deals and more deals are ahead

Nothing gets your attention more quickly than a sign that says 0% — even if you know those who have weak credit won't qualify.

Borrowers, of course, need to remember that auto lenders tend to tighten up their lending standards in tough economic times. Consumers with credit scores of 660 and lower often face a harder time getting a loan and pay much higher rates.

Even so, we're talking about more 0% deals in April than ever recorded by Edmunds.com, which has data back to 2004.

The 0% finance deals accounted for 25.8% of financed purchases in April, compared to 4.7% in March and 3.6% in February, according to Edmunds.

Car loan rates overall came down, too. The annual percentage rate on new financed vehicles averaged 4.3% in April, compared to 5.8% in March and 6.3% a year ago. This marks the lowest average APR since August 2015, according to Edmunds.

It's a buyer's market at a time when many people simply don't want to go shopping.

While some deals will work well if you need a new car, consumers still must pay attention to the potential long-term risks here.

A rate of 0% for 84 months is something that seems like free money. But if you're buying more car or truck than you typically could afford, you could be putting a big dent in your budget.

According to Edmunds data, the average loan term length hit a record high of 73 months in April.

And 81% of car buyers who financed their vehicle agreed to a loan term between 67 months and 84 months.

The average amount financed for a new vehicle climbed to a record high of $37,681 in April.

At the same time, consumers put less money down when they bought vehicles.

The average down payment dropped to $3,159 in April, a 21% decline compared to March and the lowest on record since July 2011.

A longer loan term might bring down your monthly car payment, but you risk owing far more than the car is worth when you want or need to get a new one.

The same risk could even apply if you take advantage of those skip-a-payment deals.

Ivan Drury, senior manager, Insights, at Edmunds, said offering a six-month option for delaying payments is one of the more eye-catching promotions.

But Drury said he's concerned that people often don't realize the trade-offs involved with delaying or deferring payments.

If you are able to hold onto a car or truck for eight or 10 years, he said, typically you wouldn't run into any issues if you defer two or three payments.

But if you expect to trade in your car or truck in three or four years, well, you might want to understand how deferring payments now might work against you down the road.

The average negative equity was $5,571 for consumers who trade in their vehicles for another one. That means they owe more than $5,500 on average than the old car is worth.

When you're trading in a car with negative equity, you find yourself stuck paying the difference — or rolling that debt into an even bigger new car loan if you can.

When it comes to delaying two or three payments, Drury said, you're actually slowing down how soon you'd build equity in that car.

"You don't start chipping away at that depreciation until you start making payments," he said.

Right now, Drury said, cars and trucks are being sold to either confident buyers who may have plenty in savings or a solid job, and others who need reliable transportation. Jobless claims topped 30 million nationwide in late April as the fight against COVID-19 with national lockdowns led to an abrupt shutdown of he economy in mid-March.

"At this rate, these incentives will probably be around for a few months," Drury said.

Never miss a story

Choose the plan that's right for you.
Digital access or digital and print delivery.